Real Estate Investing Adventures

Why Invest In Real Estate? 

The decision to try my first real estate project was really driven by a desire to diversify. What investments I had were in either stocks or bonds. I wanted to invest some money in something that would still hold its value if the stock market tanked. Also, let’s face it. You wouldn’t be doing commercial real estate investment or development if there wasn’t a desire to hit a homerun and make some good money.

I decided to join with a partner for this first deal for a couple of reasons:

1. By combining our financial power, we would be able to get into bigger deals.
2. The workload would be spread among two people instead of one.
3. The risk would be shared.
4. My background was in actual construction. I needed some expertise in sales and marketing.

Selecting the First Real Estate Development Project 

We investigated a number of different types of opportunities. Raw land, strip malls, storage facilities, and flex space. We rejected them all for our first deal. We just didn’t think we should take on that much risk on our first project. We wanted to make real sure that worse case we could pay off our loan and get our original equity money back out of the deal. We might not make a profit, but we wanted a high probability that all we would lose would be our time invested.

At this time there was a boom going on at one of the lakes in our area. Lake front property costs were increasing dramatically and ultra-custom, high end homes were being built more frequently and being sold for square foot prices never seen before in the region. We thought that this might be a good first project to learn the ropes. Lake front property typically holds its value well and as long as we could build the house for a reasonable price, we should be able to get our money back out of the deal if things turned bad. This was before the subprime mortgage mess and the complete shift in the housing market. Lesson learned - your worse case assumptions are usually never bad enough. We didn’t prepare for a black swan event like the collapse in the housing market coupled with the tanking of the stock market. Most of these homes were second homes for wealthy people. They are reluctant to buy when their net worth is heading south.

Due Diligence 

Prior to finalizing on the decision to develop a high-end luxury lake house, we did some due diligence. To investigate this option, we did the following:

• We met with a couple of the more successful real estate agents, explained what we were doing and had them show us a number of their best properties. This gave us a good feel for market prices and level of inventory. We then had them supply us with purchase price and selling histories for both land and homes over the last year. This allowed us to gauge the level of price increases the area was experiencing.
• Also met with three separate contractors to discuss their workload and budget pricing for the type of custom lake house we were considering.
• Interviewed two architects doing work on the lake that we liked to gauge their design fees and get their opinion of the market.

Based on the information gleaned from our due diligence, we decided to build an ultra-custom, high end lake home for our first project. At the time of our due diligence, the highest price paid for custom house on this lake was $1.7 million. We broke that record with our first project, but not without a lot of lessons learned and worry right up to the last minute. Follow on blog entries will detail our intial financial model that guided our decisions, how we set up our company and obtained financing, how we selected our lot and how we selected the architect and contractor.